Public Bill Committee

[Mr. Roger Gale in the Chair]

Further written evidence to be reported to the House

BAN 03 London Investment Banking Association

Roger Gale: Good morning. In accordance with the Speakers statement last week, I will suspend proceedings at 11 oclock and invite those present to stand in silence for two minutes in memory of those who have given their lives for their country in two world wars and in more recent conflicts. Should any Member not wish to participate, I would be grateful if they left the room prior to the silence and returned afterwards.

Clause 30

Property transfer instrument

David Gauke: I beg to move amendment No. 128, in clause 30, page 13, line 31, after second instrument, insert made under this Act.

Roger Gale: With this it will be convenient to discuss the following amendments: No. 129, in clause 30, page 13, line 33, at end insert and.
No. 130, in clause 30, page 13, line 34, leave out other.
No. 131, in clause 30, page 13, line 36, after instrument,, insert or.
No. 132, in clause 30, page 13, line 37, leave out or otherwise.

David Gauke: Welcome to the Chair, Mr. Gale. Before I commence, I once again draw the Committees attention to my entry in the Register of Members Interests.
This morning we will discuss the clauses on property transfers and partial property transfers, some of the most important and controversial elements of the Bill. The issues in clauses 42 and 43 are particularly controversial and I do not intend to get embroiled in them at this stage. None the less, we have a number of comments and questions on the matters at hand. Most of our amendments are probing and aim to flush out issues relating to the relevant clauses.
Amendments Nos. 128 to 131 are minor amendments. The intention is to seek further clarity on the clause and in particular on the definition of property transfer instrument. It appears that a property transfer instrument must be made under clauses 10 and 11. However, the drafting of clause 30 retains a degree of ambiguity and does not state explicitly that such an instrument must be made under clauses 10 or 11. The argument has been put to us that the wording of the clause could apply to a transfer of property not through this legislation, but through an agreement between parties. I do not think that is the intention, and I have no desire to press the amendments as long as the Minister gives us some assurance about those concerns. We shall be grateful for his response.

Ian Pearson: It is a pleasure to see you in the Chair again, Mr. Gale.
The clause makes provision for property transfer instruments. The Bank of England may make such an instrument to effect a transfer of property, rights and liabilities to a private sector purchaser or a bridge bank. A property transfer instrument may do one or both of two things. First, it may provide for the property, rights or liabilities of a specified bank to be transferred. Secondly, it may make other provision in relation to a transfer.
I appreciate the probing nature of the amendments tabled by the hon. Gentleman and I hope that I can give the clarification he seeks. Amendment No. 128 proposes that for the purposes of the clause, a property transfer instrument be defined as having been made under this Act. I agree that would make clear the position of the instrument; however, the status of a property transfer instrument is already implicitly so defined in the Bill as a matter of logical necessity. The amendment is thus an unnecessary addition to the drafting of the clause. The powers of the Bill can, of course, be exercised only under the Bill and, therefore, they relate specifically to the special resolution regime.
The hon. Gentleman seeks to make further changes to the provisions of subsection 1(a) and (b). In general, the amendments appear to reduce the flexibility of the provision a property transfer may make.
Amendment No. 129 would make it compulsory for a property transfer instrument to transfer property, rights and liabilities, and to make other provision relating to the transfer. That reduces flexibility. In some circumstances it may be unnecessary to make provision other than for the transfer of property, rights and liabilities. I accept that such a situation may be unlikely but it seems unnecessary to restrict flexibility in this way.
Amendment No. 130 would remove the word other from the first line of subsection 1(b). The drafting of the clause is intended to distinguish clearly the two types of provision that a property transfer instrument may make. First, an instrument may provide for the transfer of property, rights and liabilities. Secondly, an instrument may make other forms of provision related to the transfer, as I explained earlier. The deletion of the word other is thus unnecessary.

Roger Gale: Order. I am sorry to interrupt the Minister. I am sure Fabian Review is somehow relevant to the Committee, but may I gently remind Members that it is not in order to read newspapers or other publications in Committee?

Ian Pearson: Amendments Nos. 131 and 132 reduce flexibility. The changes remove the potential for a property transfer instrument to make provision in relation to property, rights or liabilities that have not been transferred by property transfer instrument. Such flexibility may be beneficial. I remind the Committee that for a property transfer instrument to be made, the general and specific conditions of SRR intervention must be satisfied. Only in those circumstances may the Bank of England make a property transfer instrument. The Government consider that once that test has been met, it is right that the authorities have the appropriate powers to resolve the bank. That could involve a situation where a consensual transfer can be agreed but needs to be supported by stabilisation powersfor instance, to make provision for continuity or in relation to default event provisions, as we shall discuss. Such flexibility is provided by the words that the amendment seeks to excise from the Bill. Although we accept that the situations where that may be possible are rare, as the provision would be a less invasive exercise of statutory powers we consider it appropriate to have that flexibility. I hope that I have satisfied the hon. Member for South-West Hertfordshire about our intentions regarding the clause.

David Gauke: I am grateful to the Minister for that response. On amendments Nos. 129 and 132, I accept his argument that greater flexibility may be necessary, albeit unlikely. It is helpful to the Committee that the Minister has elaborated on the rarity with which those powers are likely to be used.
I detected that the Minister did not have much objection to amendment No. 128, which inserts the words made under this Act, and that he may almost have felt that it would assist the drafting. However, I take the point about the provision already being implicit. Having heard the Minister, I am still not convinced that amendment No. 128 could not improve the Bill in a minor way, but I do not intend to divide the Committee on the matter. If the Government were inclined at a later stage to insert the wording for clarification for those unfortunate people who will not have read this debate, I should welcome it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 ordered to stand part of the Bill.

Clause 31

Effect

David Gauke: I beg to move amendment No. 133, in clause 31, page 14, line 6, leave out or.

Roger Gale: With this it will be convenient to discuss the following amendments:
No. 134, in clause 31, page 14, line 7, leave out in any other way and insert common law.
No. 135, in clause 31, page 14, line 12, leave out (by any name).

David Gauke: Clause 31 relates to the effect of a transfer, which we touched on in the debate initiated by my hon. Friend the Member for Wellingborough last week. He raised the issue of whether subsection (3) has effect notwithstanding EU provisions. I have no intention of repeating that argument, but there are one or two ambiguities in the clause; in particular, subsection (3) refers to the transfer taking effect
despite any restriction arising...in any other way.
It would be helpful if the Minister could explain what that means. The subsection also refers to contract or legislation, so presumably in any other way means a common law restriction. If it means more than that we would welcome clarification. Our intention, in particular with amendment No. 134, is to flush that out.
With amendment No. 135, we query whether (by any name) in subsection (4)(b) is necessary. It is a drafting point, but the expression does not seem to add a great deal to the interpretation of the subsection. Can the Minister explain otherwise? I shall raise one or two points in a stand part debate, but the purpose of the amendments is to seek clarity from the Minister as to the intention of the clause.

Peter Bone: I speak in favour of amendment No. 134. The Government seem to have made it clear in earlier debates that one cannot use the words in any other way because the EU laws apply. Removing in any other way and inserting common law would mean that the Bill will do what the Government say it should do, so the amendment is most helpful for them.
The front page of the Bill states that in the view of the Chancellor of the Exchequer the provisions of the Bill
are compatible with the Convention rights.
However, they cannot be compatible when the purpose of the clause is to tear up normal rights because we are dealing with an exceptional circumstance. Will the Minister explain how the Chancellor came to that conclusion?

Peter Viggers: I am a bit concerned about the clause so I hope that the Minister can reassure me. The drafting is slightly casual. Substituting in any other way in subsection (3) with common law would make the clause clearer. I am not sure whether the words contract and legislation would limit the words in any other way. The legal term for that is eiusdem generis.
The long title of a Bill limits the amount of material in the Bill; similarly, in parliamentary terms, a parliamentary question must be followed by supplementary questions that derive from the main one. The eiusdem generis rule, if strictly applied to the Bill, would mean that the words in any other way would be subject to the words contract and legislation. They would not give the freedom that they appear to give the Government, but could be construed within the rules of eiusdem generis, meaning that the provisions would be subject to contract legislation.
On amendment No. 135, I hope that the Minister will be able to spell out for us what he anticipates that consent by any name will mean. If he can explain what the other names for consent may be or why the definition of consent needs to be expanded to include by any name it would be reassuring. If he cannot I would find it rather more disturbing. I endorse my hon. Friends probing amendment.

Ian Pearson: The clause makes provision in relation to the effect of a property transfer instrument. Its purpose is to ensure that a transfer of property is effective in law and takes place in spite of any restrictions that might otherwise exist, such as a requirement to secure the consent of a person who does business with a bank. The hon. Member for South-West Hertfordshire has proposed a set of amendments that would narrow the interpretation of the clause. I will seek to explain why we believe they are unnecessary and unhelpful.
Subsections (3) and (4) of the clause, which the hon. Gentleman wants to amend, are drafted in deliberately broad terms. Once the authorities have decided to intervene in the public interest to resolve a failing bank and the necessary general and specific conditions have been met, the Government consider it appropriate that a transfer should take effect despite any restriction. That is to maximise the chances of a successful resolution in so far as is feasible.
For that reason I do not consider that the changes proposed in amendments Nos. 133 and 134 would be appropriate. They would restrict the breadth of restrictions relating to contracts, legislation and common law. The changes would be likely to be a subject of interest for people seeking to pick holes in the transfers; for example, a party could argue that a restriction that was ignored did not technically relate to a contract, legislation or common law and that it would, therefore, get in the way of a successful transfer and resolution under the SRR.
Of course, notwithstanding the provisions of the clause, a transfer may not take effect in a manner that contravenes Community lawa point highlighted in the debate prompted by the amendment tabled by the hon. Member for Wellingborough. In addition the Treasury has reserve powers, which we will consider in the debate on clause 66, to ensure that international obligations that do not have effect in domestic law are nevertheless not contravened by the exercise of powers under the SRR. Subject to those constraints, the Government consider it appropriate that a transfer should take effect despite any other restriction.
The hon. Member for Wellingborough raised the issue of compatibility with the European convention on human rights. It would not be normal for Secretaries of State to give detailed justification as to why they think a complete Bill is compatible with convention rights. It is important for me to respond directly to amendment No. 135, which appears to narrow the definition of what may be deemed a requirement for consent.

Peter Bone: I thought that the Minister was about to explain why the Government thought that the convention was not under threat from the Bill. It seems clear to me that it is, because rights under contract are being torn up. That is the whole purpose of the clause. The argument that the Minister will not tell me will not do. The Government must explain; there must be some general reason why they think that the Bill complies with the convention.

Ian Pearson: Let me have another try to see if we can go further in response to the hon. Member for Wellingborough. It is normal practice that if a Bill confers powers, they must be exercised in a way that is compatible with the convention. It is clear that that can be done in a way that is compatible with convention rights, so personal property rights can be overridden if the Governments action is proportionate and in the public interest. That is the case with the Bill, which is why the statement has been made.
Amendment No. 135 appears to narrow the definition of what may be deemed a requirement for consent. One of the principal rationales for the stabilisation tools is that it may be necessary to circumvent the usual mechanisms for transferring shares or property, if it is in the public interest. Given that it is imperative that a transfer occurs immediately and with full effect, it is right that there are no restrictions on making the transfer once the general and specific conditions have been met.
If the provisions of the clause were narrowed, private sector transferees might be deterred from acquiring a failing deposit takers business, as they may perceive that a significant execution risk is attached to the transfer. A transfer to a private sector purchaser is unlikely to be arranged unless commercial counterparties are certain that they will obtain complete control over the property transferred to them. I hope that clarifies the points that have been raised by hon. Members, and that the amendment can be withdrawn.

David Gauke: We have strayed on to the European convention on human rights and I will return to it in the stand part debate. On the Ministers comments on my amendments, I am not clear about what in any other way, for amendment No. 134, or by any name, for amendment No. 135, might mean. I am not sure what those words add to the clause. I take the Ministers point that it is important that the transferorthe private sector purchaseris certain of complete control, but I do not see how by any name assists in that process. Equally, however, I do not see how the phrase does any harm, so I shall not press for a Division.
Reluctantly, I shall not press for a Division on anything else, even though I do not think that the Minister gave the Committee a full answer as to why the wording is necessary, but we are in bipartisan times. I do not know whether the Minister wants to intervene and have another crack at it.
I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

David Gauke: The heart of clause 31 is about providing certainty in a transferensuring that it occurs and that the Government go as far as they can to provide certainty. Does the Minister acknowledge that the effect of clause 31 is deeply constrained, by necessity, for the reasons that my hon. Friend the Member for Wellingborough identified. First, European Union law overrides the provisions of subsection (3), and, secondly, convention rights and, in particular, the Human Rights Act 1998, contain provisions about respecting private property.
Does the Minister agree that challenges to the effects of the Bill, regardless of the provisions set out in clause 31, are likely to come from European law or the Human Rights Act? The provisions will not be effective in dealing with such challenges and will not provide the certainties for the transferor that the Government seek. I do not make that point in a particularly hostile or antagonistic way, and no doubt the Minister will assert that he is confident that nothing that occurs under the Bill, once enacted, will breach the Human Rights Act, but that will be for the courts to determine. I merely raise what appears to be an unavoidable situation. Clause 31 contains some holes and does not provide complete certainty of control because of the structure of our law, the Human Rights Act and European Union law.

Peter Bone: I should like to follow up on what my hon. Friend has said. If we accept the clause, we shall be doing something that is probably unique. We will definitely be passing, in common parlance, a piece of legislation that states it will overrule EU Acts. That is clearly the Governments intention. If the Bills provisions had to be implemented following a disaster, the national emergency would clearly be such that we would not care two hoots what the EU said and would carry on doing what was in the interests of the British nation. The Government are correct in that view and should be congratulated on it, but they should not be congratulated on pretending that such an emergency would not happen, because it clearly could. Members on the Conservative Benches have given the Government an opportunity to spell that out, but they have declined to do so. However one reads things, we are clearly saying that we will do what is right in the national interest to protect the financial system and we will ignore what the EU says.
Equally, the Chancellors statement that the Bill is compatible with the convention on human rights is clearly contrary to the facts. Those rights cannot be taken away in such a manner, for the protection of financial stability in a crisis, without affecting the individuals human rights. I am afraid that is neither proportional, nor a proper manner, and for that reason the statement should not be on the front page of the Bill. I congratulate the Government on what they are about to do, but I am afraid that I do not congratulate them on lacking the courage to put in the Bill what they actually mean. The Government, whichever party was in power, would stick up for the rights of the nation, but it is a shame that this Government will not put that in the Bill.

Ian Pearson: Clause 31 describes the effect of a transfer of a failing banks property rights and liabilities, and its real purpose is to ensure that the transfer of property is able to provide certainty of outcome and speed of execution, in spite of any restrictions that might otherwise exist. Despite the comments of the hon. Member for South-West Hertfordshire, I believe that the clause and the Bill as a whole help to provide certainty of outcome.
The clause makes similar provisions to those in clause 16, which provides for the effect of a share transfer instrument or order, and members of the Committee will recall that we discussed that in the light of the amendments tabled by the hon. Member for Wellingborough regarding European Community law. As I said then, we believe that the Bill is compatible with European Community law and with our responsibilities under the convention on human rights.

Roger Gale: Order. In a moment I shall suspend the Committee for two minutes. For the benefit of Members who were not present at the start, Members will be invited to rise. If any Member does not wish to participate, given that they are already in the Room, I suggest that they remain seated.

The Committee observed a two-minute silence.

Ian Pearson: Discussing the amendments to clause 31 a few moments ago, I mentioned the importance of acting in a proportionate manner and in the public interest. Article 1 of the first protocol of the European convention on human rights provides for the protection of property rights, but that protection is not absolute. Property rights may be interfered with where it is in the public interest and proportionate to the aim pursued.
Very powerful public interests are demonstrated by the satisfaction of the general and specific conditions in the SRR. In addition, the Bill makes provision for the assessment of compensation that would demonstrate that a fair balance has been struck when intervening under the SRR to protect financial stability and depositors. We believe that the actions we are taking are very much proportionate and in the public interest. We have consulted on them extensively, as the Committee is aware.

David Gauke: I am grateful to the Minister for his comments and am not surprised by what he said. Will a court ultimately determine whether the actions taken under the Bill are proportionate? I expect the Government to say that those actions will, of course, be proportionate and will need to comply with the European convention on human rights, but does the Minister recogniseI do not attack the Government on thisthat there will always be a slight question, because of the nature of the European convention on human rights and the Human Rights Act 1998?

Ian Pearson: I understand the point that the hon. Gentleman makes. We think that the actions that we propose are in the public interest and are needed to protect depositors, and we believe strongly that they are proportionate. It may be possible to construct a legal opinion that suggests otherwise, but that would be quite difficult, as we feel very confident of our grounds. There is widespread recognition that we need powers to deal with failing banks and building societies. That is why we are discussing the Bill and why we had to take action under the Banking (Special Provisions) Act 2008. It would be difficult to construct an argument that we are not acting in a proportionate way through the Bill. It is vital that provision be made to make it clear that a transfer takes effect notwithstanding any restrictions in contract, legislation or any other form, which is why we have phrased the clause in the way we have.

Question put and agreed to.

Clause 31 ordered to stand part of the Bill.

Clause 32

Transferable property

David Gauke: I beg to move amendment No. 136, in clause 32, page 14, line 23, leave out (including legislation of the European Union).
The amendment relates to subsection (1)(e), which is one of those pieces of drafting where one suspects that the draftsman and the Government have something in mind. The aim of the amendment is to find out what that is and whether it is possible for the clause to be more explicit. My amendment would remove some wording, which I am keen to replace with more specific wording, but until we know what the Government have in mind it is not possible to propose an amendment that is more specific.
The subsection refers to a property transfer instrument transferring property rights or liabilities, including rights and liabilities under an enactment
(including legislation of the European Union)
the words that I seek to remove. What EU legislation do the Government have in mind? Do they have in mind passport rights under the markets in financial instruments directive or the banking co-ordination directive? The passport rights in those directives enable a branch of a European economic area institution to locate in the UK. Are those the sort of rights and liabilities that the Government envisage? If not, what do they have in mind? The amendment is intended to press the Government to elaborate on what they are seeking to address, with a view to tightening up the Bill so that we know what sort of enactment under EU legislation they mean.

Peter Bone: I support my hon. Friends amendment. It is clear that the idea of the parliamentary draftsman and his interpretation of the Ministers wish was that the provision would be governed by the sovereignty of Parliament, otherwise there was no need to put those words in. We were told earlier that the Government believe that the measure complies with EU law, so it is not necessary to say that because it is implicit. If that is the case, the additional words are not necessary and my hon. Friends amendment is correct.
I suspect that the draftsman included those words because he intended in the previous clause that we would override EU law. The Bill does not seem to match the Governments intentions and my hon. Friends amendment is most helpful to the Government. I expect the Minister to accept it.

Ian Pearson: No, I am afraid that I shall not do so. The hon. Member for South-West Hertfordshire asks a good question. If I explain the intention behind the wording, perhaps matters will become a little clearer.
Clause 32 provides that a property transfer instrument may transfer any property, rights and liabilities, and gives specific examples of the types of property that that may include. For instance, the instrument may transfer property acquired between the making of the instrument and the transfer date. It may also make provision for foreign property owned by the bank to be transferred. Having consulted those who prepared the Bill, I want to make it clear that the intention is to enable the transfer of the broadest possible range of property, rights and liabilities. As we explained elsewhere during the passage of the Bill, we have tried to future-proof it, which is a matter of course in legislation, so that we do not have to keep revising it.
The final example of what transferable property may be, as the hon. Gentleman noted, is rights and liabilities under the enactment, including legislation of the European Union. The hon. Gentleman seeks to probe us by removing that reference to Community law. I tried to think of examples in which that might be appropriate. The first example that my officials came up with was milk quotas, which would not normally apply to the banking sector, but it is an example of a property right under European law. Carbon trading permits under the EU emissions trading scheme may well be an appropriate example. We do not know what instruments may be included in the future.
Why is there a problem with including EU legislation, given the possibility that something might be applicable and could be transferred if the special resolution regime was engaged? It seems a sensible and logical thing to do. It would be rather perverse to exclude something because it originated in EU legislation.

Peter Bone: Earlier in the debateindeed, throughout the debatewe have heard that we do not need to put the words in the Bill because it already complies with Community law. Anything in Community law applies to the Bill, so the words are unnecessary. If we take them out, and if the Government are right, the context does not change because the European Communities Acts apply. The wording seems superfluous and we try not to include such wording in Bills. I cannot see the logic of putting it in when it already applies and we have not put those references in anywhere else.

Ian Pearson: I cannot see the logic of taking the wording out. I am advised that those are not superfluous words and that they are needed to ensure that we have a broad and encompassing definition to make it very clear that any property rights and liabilities that are included in EU legislation could be transferred under the powers in clause 32, if the special resolution regime was engaged.
I want to be clear. The reference is not intended to suggest that the Government will legislate in a manner incompatible with Community law, as I explained previously. That is not possible and the Government would not seek to do it. I hope the hon. Gentleman and members of the Committee are satisfied that the provisions in the clause are appropriate, needed and sensible, and I hope the hon. Member for South-West Hertfordshire will withdraw his amendment.

David Gauke: I am grateful for the Ministers response. As I said in my opening remarks on the amendment, my intention was to flush out exactly what the Government had in mind when they referred to EU legislation. I was not expecting milk quotas. The provision would appear, from what the Minister has said, to be largely precautionary and I have no objection to it other than that it seems vague. The Minister did not refer to passporting rightsI anticipated that they would be considered rights under an enactment, including EU legislation. I do not know whether passporting rights would fall under the provision. Although we did not receive the expected clarification, the Ministers remarks were helpful. The wording does no particular harm, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

David Gauke: I have one question, which we could also address under clause 36 on foreign property. It concerns the rights and liabilities under the law of a country or territory outside the UK, which, according to clause 32, a property transfer instrument may transfer. There will always be foreign law issues, and there may be a clash between these provisions and foreign law. A particular issue is that under our arbitration Acts we acknowledge and respect decisions made by foreign arbitrations, but it is not entirely clear how the provisions in clauses 32 and 36 relate to those Acts.
I do not expect the Minister to respond on that point, but I mention it as something that he and his advisers might want to consider. There may be nothing to it, but it might be helpful for the Committee that I have mentioned it. It also might be helpful if the Minister, either now or under clause 36, told the Committee how the relationship between foreign law and the provisions will work, and whether there are difficulties with transferring rights and liabilities under foreign law when we are not necessarily in a position to do so.

Ian Pearson: It is important that a property transfer instrument is able to transfer all of a failing banks property. If a crucial element of a banks business were left behind, that could jeopardise the effectiveness of the transfer. If a private sector purchaser believed that to be a material risk, it might not agree to take part in the transaction. With a property transfer to a bridge bank, if some property could not be transferred, that might reduce the likelihood of an ultimate sale or increase the risk to public funds. That is why the clause is particularly necessary.
The inclusion of foreign property in the scope of the clause is crucial, given the international and multi-jurisdictional nature of many of the UK's banks. At the moment, I do not have a direct answer to the arbitration point raised by the hon. Gentleman, but we can discuss it further under clause 36 and the obligations there, because we need to ensure that a transfer of foreign property is effective. Overall, the clause underpins the effectiveness of the Bills property transfer powers, and I urge that it stand part of the Bill.

Question put and agreed to.

Clause 32 ordered to stand part of the Bill.

Clause 33 ordered to stand part of the Bill.

Clause 34

Licences

David Gauke: I beg to move amendment No. 137, in clause 34, page 15, line 20, leave out despite the transfer and insert
as if the transferee is the transferor.
The amendment addresses a drafting issue. Clause 34(1) states:
A licence in respect of anything transferred by property transfer instrument shall continue to have effect despite the transfer.
Concern has been raised with us that the clause, as currently drafted, appears to have the effect that the licence endures only for the benefit of the transferor, as opposed to the transferee, which I do not think is the intention. The amendment would mean that both the transferor and the transferee gain the benefit of the licence. I expect the Minister to confirm that the amendment accurately reflects the intention behind clause 34(1) and that the clause, as currently drafted, would not have that effect. Our intention in tabling the amendment is to ensure that the Minister dispels any ambiguity that might exist in the current drafting.

Ian Pearson: The clause provides for a property transfer instrument to make provision in relation to licences, and the purpose is to ensure that, if any banking business transfer relies upon a licence, appropriate provision may be made to ensure that the transfer is effective. An important example is any form of IT licence granted to a deposit taker that might give it permission to use a particular type of system to operate its business. To ensure continuity of banking services, it is important that those licences are valid after a transfer.
The hon. Gentleman proposes to amend the phrasing of subsection (1). I accept that the provision set out in subsection (1) is broad, but I also point out that subsections (2), (3) and (4) provide for the power to be refined to the particular resolution. For example, if it was in the public interest to exclude a licence from the operation of the clause, the property transfer instrument could provide for that. There is also the flexibility to apportion responsibility for compliance with a licence between a transferor and a transferee. Given the scope for refinement and honing, I consider the original wording to be preferable. The amendment also overlaps with the continuity provisions, which can be made under clause 33. Therefore, I ask the hon. Gentleman to withdraw the amendment, and if it is pressed to a vote, I urge members of the Committee to reject it.

David Gauke: I am not sure that the Minister has quite got to the heart of my concern, which was not so much that subsection (1) was too broad, but that in a way it was too narrow. It seemed to suggest that the licence endured only for the benefit of the transferor, which is not the intention behind the clause, unless the Minister wishes to say otherwise. What the Minister has said makes the intention of the clause clear: the licence will apply for the transferee as well as the transferor. That provides sufficient clarification for me, so I will not press the amendment, but I am not sure that the Ministers remarks quite got to the heart of my concern.

Ian Pearson: I apologise for not covering that point. Subsection (1) states that the licence has effect with respect to the transferred property. The transferred property is transferred to the transferee. So I can confirm that it is the intention of the clause that relevant licences apply to the transferee.

David Gauke: I am grateful for that explanation. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

David Gauke: My question relates to subsection (3) which states:
Where a licence imposes rights or obligations, a property transfer instrument may apportion responsibility for exercise or compliance between transferor and transferee.
In a scenario where the responsibilities are apportioned to the transferor and transferee and the transferor does not comply with the responsibilities under the licenceperhaps he is in breach of a systems licencewhat rights does the transferee have? How is the apportionment enforced? The transferee could be dependent upon the transferor complying with a particular licence and if the transferor does not do so, the transferee appears to be in a vulnerable position. Again, this comes back to the question of certainty and ensuring that we have a system in place that is supportive of transferees to make it an attractive proposition.
There is nothing about this in the clauseit may be elsewhereand in those circumstances it seems that apportionment may leave the transferee vulnerable. An amendment to the clause might provide the transferee with an ability to enforce the obligations contained within a licence or perhaps for it to take over those obligations subsequently. I am sure that the Minister will appreciate my concern. I do not claim that there is an easy solution, but I throw it open to the Committee and ask the Minister to explain how the Bill as currently drafted seeks to address the problem.

Ian Pearson: I understand the point that the hon. Gentleman is making about subsection (3). In normal circumstances the property transfer instrument would determine the apportionment of responsibility for exercise or compliance between the transferor and the transferee and it would have been expected that both the transferor and the transferee would be content with the instrument that was being applied. The enforcement of the licence will depend on the circumstances, but the effect of the exercise of the power under the clause will be to alter the legal entitlements under the licence, whether under private or public law. I hope that provides at least some clarification for the hon. Gentleman. If there is anything more that he wishes to raise, I would be happy to consider it.

David Gauke: For clarity, is the Minister essentially saying that the property transfer instrument is the agreement that will address this point and that the transferee may well have a contractual right against the transferor to deal with this matter?

Ian Pearson: Yes, indeed. That is my understanding.

Question put and agreed to.

Clause 34 ordered to stand part of the Bill.

Clause 35

Termination rights, &c.

David Gauke: I beg to move amendment No. 138, in clause 35, page 15, line 34, at end insert or.

Roger Gale: With this it will be convenient to discuss amendment No. 139, in clause 35, page 15, leave out lines 37 to 41.

David Gauke: The clause relates to termination rights. In particular, it contains a definition of default event provision and provides a list of circumstances. Amendment No. 139 would delete items (e) to (i). We are raising a query because the items provide examples of circumstances that do not appear to be termination rights or default events as such but could cover almost any obligation under a contract.
For example, item (e) reads,
a sum becomes payable or ceases to be payable,
and item (f) reads,
delivery of anything becomes due or ceases to be due.
Item (h) reads,
any other right accrues, changes or lapses,
and (i) reads,
an interest is created, changes or lapses.
Those situations are quite broad and might happen in the course of a contract without any suggestion of a default event. Will the Minister clarify why those subsections are there? Does he recognise the concern that, given the current drafting of clause 35, a default event appears to be very broadly defined, and will he explain to the Committee why that is the case?

Ian Pearson: The clause sets out certain provisions relating to events of default and makes similar provisions to those in clause 21, which we debated last week. As has been noted, events of default are extremely common in contractual documentation. If the act of making a transfer or events leading up to that act triggered contractual rights for parties to terminate or modify their contractual arrangements with a failing bank, it could reduce significantly the banks ability to continue as a going concern. That would reduce the value of the business transferred and might even render resolution under the special resolution regime impossible. Clearly, that would have a number of significant implications for the resolution.
A transfer of property is likely to be characterised as an event of default, which would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers. Therefore, the provisions in the clause specifying that the authorities may turn off event of default clauses are extremely important for a successful transfer.
Subsection (1) defines a default event provision. The hon. Gentlemans amendment would significantly narrow that definition. In broad terms, what he seeks to achieve is to carve out events that do not relate specifically to the right to terminate, modify or replace agreements. Although the amendment would still provide the authorities with the means to turn off any right to terminate, they would not have the power to turn off other rights that might accrue through the exercise of the property transfer power. We believe that the existence of those rights could pose significant challenges to the resolution.
For example, suppose that the counterparty could create the right for a penalty sum to be payable if the property transfer powers were exercised. That could require the authorities to pay a substantial sum if relevant property were transferred to either a bridge bank or a private sector purchaser. That would not be in the public interest, and could have the same economic and commercial effect as a right to terminate the agreement, or perhaps an even more adverse effect.
The hon. Gentleman says that the powers are very broad. They are far more refined than the powers taken in the Banking (Special Provisions) Act 2008, which includes powers for authorities to turn off any event of default of any person having a specified connection with a deposit taker, a very broad power indeed. In contrast, the provisions in clause 35 are significantly more refined. The default event provision cannot be entirely unrelated to the transfer. Instead, it must be related to
the making of the [property transfer] instrument...anything that is to be, or that may be, done under or by virtue of the instrument, and...any action or decision taken or made under this or another enactment in so far as it resulted in, or was connected to, the making of the instrument.
They are also designed to be adapted to particular circumstances. Therefore, where practicable, an event of default could be modified rather than entirely disapplied, as provided for in subsection (4). The very broad powers in the Banking (Special Provisions) Act 2008 have been narrowed following consultation and contained in clause 35.
I hope that I have demonstrated to the Committee that this clause is necessary and that the amendments would place an unwarranted restriction that might get in the way of a successful resolution.

David Gauke: I am grateful to the Minister for that response. In the light of his comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Peter Bone: This clause is extremely important and the Government are right to draw it to our attention. I wonder what would happen in the case that, although the default clause could not be operational under law, nevertheless the company with the default clause went ahead. Is this similar to chapter 11 protection in the USA, where creditors cannot enforce against a company that is in chapter 11? Is it the intention that if a company is dealing with a bank which then has a transfer under these provisions, it is forced to continue with the original contract in the manner in which it was first drawn up and not allowed to stop? I assume that is what it means, but I would like the Minister to clarify that point.

Ian Pearson: I am happy to provide what clarification I can. It is important to set this clause within the overall context of what we are trying to achieve, which is to deal with failing banks and to find the most appropriate remedy, whether it be transfer to a private sector purchaser, a bridge bank or taking the failing bank into temporary public ownership. This clause sets out certain provisions in relation to events of default. In the circumstances of a failed bank where we want to take action in the public interest and protect depositors, we cannot have a situation where events of defaultbuilt into contracts under normal contractual arrangementscan be engaged and in effect frustrate the action that we want to take in the public interest. Disapplying these events of default provisions, as we seek to do in this clause, is a sensible way to ensure that we can use the SRR for the purposes intended.

Peter Bone: I understand the Ministers argument entirely. It is right that the person who would normally enforce the default clause is not allowed to enforce the default, which may be to claim back the money. Does it go further to establish the principle that parties have to continue with the contract in the previous form, or are they allowed to stop the contract but not enforce the default clause?

Ian Pearson: I understand the point the hon. Gentleman is making. The purpose is certainly to allow transfers to go ahead and there will be a right to continue the contract. He raises an important point about whether a counterparty might subsequently desire a change of contract in the future; I think that that would be part of normal commercial arrangements. The intention is to deal with situations as I have described, in which we are trying to rescue all of or parts of a failing bank. It would not be possible to transfer property effectively if events of default were being exercised on a routine basis, which is common in normal commercial contracts. That is why the termination rights clause is in the Bill and is essential if we are to have effective property transfers.

Question put and agreed to.

Clause 35 ordered to stand part of the Bill.

Clause 36

Foreign property

David Gauke: I beg to move amendment No. 140, in clause 36, page 16, line 19, after means, insert property which is.

Roger Gale: With this it will be convenient to discuss the following amendments: No. 141, in clause 36, page 16, line 20, leave out property and insert physically situated.
No. 142, in clause 36, page 16, line 21, leave out
rights and liabilities under foreign law
and insert
a right in action which exists only under the jurisdiction outside the UK (disregarding any arbitration provisions).

David Gauke: I mentioned clause 36 a moment ago in the context of foreign property, of which the clause provides a definition. Amendments Nos. 140 to 142 are probing amendments, which attempt to clarify the definition of foreign property. The provision is important in that it applies to a partial property transfer order to preserve set-offan issue that we shall turn to shortly. Therefore, it is important to get the definition right. There is a drafting error in amendment No. 142, which the Minister may identify.
I shall give the Minister and the Committee examples of circumstances in which it is not entirely clear what is and is not foreign property. I will be hugely impressed if the Minister is able to provide an immediate answer; I fear that I am being a little unfair on him for ambushing him by providing these examples, but any guidance that he provides will be helpful. None the less, if there is uncertainty, it is helpful for the Committee to be aware of it.
We have received representations giving areas where the current definition is unclear. The examples are as follows: First, English law bearer securities held outside of the UK, for example in Euroclear, in Belgium, or in Clearstream, in Luxembourg; secondly, a New York-law-governed option over UK property, for example commodities held in a UK warehouse; thirdly, an English-law-governed right to the delivery of US securities; and finally, a German-law-governed right to the repayment of a loan denominated in sterling made by a UK bank branch.
I do not expect the Minister to provide immediate answers, but I may be doing him down. I highlight those cases to demonstrate that this is a complicated area. What is foreign property and what is UK property is not always clear, given that there are various conflicting elements, such as the choice of law, the relevant currency and the type and location of the property. There are all sorts of complicating factors. It has been put to us that clause 36 is perhaps not as clear as it might be in determining which factors are predominant.

Ian Pearson: We have already considered, in clause 32, that a property transfer instrument may make provision to transfer foreign property. In domestic law, the transfer of foreign property will be recognised as effective because it is authorised by primary legislation. The only exception to this is when the transfer is contrary to European Community law, an issue that we considered in the debate on the proposed amendment to clause 32 tabled by the hon. Member for Wellingborough. The critical question is whether the transfer of foreign property will be recognised as valid under foreign law legal regimes. If foreign courts will not recognise the transfer, it might not be practically effective.
Clause 36 makes further provision to ensure that transfers of foreign property are recognised as effective when that is not the case simply by virtue of the property transfer instrument. In particular, an obligation is imposed on the transferor to take steps to ensure the effectiveness of the transfer under the foreign law legal regime. For instance, the transferor might have an obligation to ensure that property registered in the United States, or in any other country, is effectively transferred.
The hon. Member for South-West Hertfordshire raised some interesting points on whether our definition of foreign property is adequate and on what may or may not be covered. I do not have an answer for him immediately available. However, I can respond to the point he made about arbitration when we discussed clause 32. The purpose of clauses 32 and 36 is to secure the greatest possible scope for the recognition of transfers under foreign law. International commercial documentation may be subject to arbitration provisions, so the effect of the exercise of stabilisation powers will depend on the context. In certain circumstances, it might be necessary to override provisions subject to arbitration, such as an event of default that applies on the exercise of stabilisation powers. However, if a later question arose on the compliance with the agreement by the transferee, that matter would fall to be determined by arbitration in the ordinary way.
Amendments Nos. 140 to 142 seek to change the definition of foreign property. That provision has deliberately been drafted broadly so that it applies to all property where questions of recognition under foreign law legal regimes might arise, and the hon. Gentlemans amendments are likely to narrow the scope of the definition. Again, that relates to our general point that we seek to future-proof legislation as far as possible and have broad categories, rather than specific ones for particularly narrow definitions. Were the amendments to be accepted, the provision of clause 36 could not be used for some foreign property, even if doing so would be beneficial for the resolution and in the public interest. I am sure that the hon. Gentleman would not want that to happen.

Peter Bone: I am grateful for the Ministers explanation. Have there been discussions with the American Government about the transfer of what would, in effect, be their assets, if an American company were involved? Has there been an agreement with the Americans that one would be allowed to register in America, despite that perhaps damaging the rights of a US-based company? Has there been intergovernmental discussion on those issues?

Ian Pearson: I am not aware that the UK Government have had discussions on the Bill with foreign Governments. We have, however, consulted extensively with the banking sector. Many banks that operate in the UK are international and are governed by a variety of jurisdictions. The points that have come back to us from the consultation reflect the global nature of the banking system. In general, if a matter is wholly governed by domestic law, the transfer will be effective because it is authorised by primary legislation. Here we are talking about matters governed wholly or partly by foreign law, which will attract the additional assistance provided for in clause 36.
I shall give an example of problems that might arise if amendments Nos. 140 to 142 were accepted. The amended definition of foreign property would not extend to liabilities under foreign law, yet liabilities might form a key part of a contractual relationship critical to the operation of the banking businessfor example, the obligation to pay for services provided under an IT contract. Clauses such as clause 36 have been used in other contexts, for example in paragraph 11 of schedule 21 to the Energy Act 2004, which makes provision for energy transfer schemes where energy companies enter special administration, and in the Banking (Special Provisions) Act 2008 itself.
Although the provision in the clause cannot guarantee foreign law recognition in all circumstances, it gives the authorities the greatest scope possible under domestic law to secure such recognition, and could prove to be an essential component of a successful resolution. I therefore invite the hon. Member for South-West Hertfordshire to withdraw his amendment, because it would unnecessarily and unhelpfully get in the way of a potentially successful resolution under the SRR.

David Gauke: We are in danger of falling into the traditional roles of a Government Minister seeking greater flexibility and an Opposition spokesman seeking greater clarity. It is probably right that we perform those roles.
I am grateful for the Ministers comments on the arbitration provisions. As I mentioned, I did not expect him to be able to respond to the examples that I gave of ambiguity in the definition of foreign property. It may be helpful to the Committee and for the general interpretation of the clause if he could provide a written response.
I will not press the amendments. I have made my point, which is that there is a lack of clarity. I understand why the Government want flexibility in the circumstances, but outside bodies have suggested that it is not clear how the provision will work. It would be helpful for all concerned if the Minister would address that in due course. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

David Gauke: I beg to move amendment No. 143, in clause 36, page 16, line 32, leave out subsection (6).
Subsection (6) states:
An obligation imposed by this section is enforceable as if created by contract between the transferor and transferee.
It is not entirely clear why the deemed contractual provisions should displace a persons right under breach of statutory duty. I should be grateful if the Minister could explain why the subsection is included here. I have not noticed whether it is included elsewhere.

Ian Pearson: As I made clear, clause 32 is about property transfer instruments involving transfer of foreign property. As we said earlier, clause 36 provides a mechanism to require a transferor to take steps to ensure that the transfer is effective. Such provisions were used in the resolution of Bradford & Bingley. The transfer order provided that Bradford & Bingley should take appropriate steps to make the transfer of foreign property to Abbey Santander successful.
The mechanism for ensuring that a transferor takes appropriate action is that an obligation may be placed on him. The hon. Member for South-West Hertfordshire proposes that the obligations should not be enforceable as if created by a contract. The Government consider that this would reduce the likely effectiveness of a transfer of foreign property. If an obligation were not enforceable as a contract, it would be more difficult to compel the transferor to take steps to ensure that a transfer was successful.
For example, because the obligation is enforceable as a contract, any person who is unwilling to comply with it must consider whether the authorities would be able to bring a claim for substantial damages, should non-compliance prejudice the resolution and give rise to economic loss. Other contractual remedies would also potentially be available to compel compliance with the obligation, such as an interim injunction and an order for specific performance. The absence of such incentives to comply would reduce the likelihood of a successful resolution, particularly if a piece of foreign property was essential to the operation of the bank. Further, it could put off a potential private sector purchaser. In short, the Government do not believe it would be in the public interest to admit this provision, and it is for those reasons that we think that Amendment No. 143 would be damaging and unhelpful.

David Gauke: I am grateful for that explanation. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Peter Bone: When I dealt with the United States when I was in business, our contracts always included a clause stating that they would be interpreted by the law of a particular jurisdiction. Sometimes it would be UK law and sometimes it would be US law. What happens here? If the clause states that it will be interpreted in relation to UK law, all the damages and all the threats in this very sensible clause would apply. However, if it is interpreted under the laws of the USA, none of that would apply. How do the Government intend to get around that problem unless there is some sort of mutual discussion with other states, particularly a major trading partner like the US?

Peter Viggers: I do not wish to oppose the clause. In noting its importance, I assume that the word property in the present context means anything capable of being owned. I assume that it is a broad definition and not restricted to real property. I assume that the word foreign means anything that is not susceptible to UK law. I can see that the Government are trying to make the proposals as comprehensive as possible. They need to be sweeping proposals because the subject with which we are dealing is extremely complicated.
My hon. Friend the Member for Wellingborough referred to American law but I think I am correct in saying it is not American law that would govern such a contract but the law of Delaware or California or Rhode Island. That, too, is a complication.
Some of the instruments that can be brought forward can be extremely opaque. I remember that the most opaque instrument I was capable of creating when I operated many years ago was a Liechtenstein Anstalt, which is an unincorporated body in Liechtenstein, controlled by Virgin Island bearer shares, which is almost impossible to work through. It is a very opaque suitcase. So we are dealing with complicated fields which can require very sweeping provisions.
Subsection (6) says that
an obligation imposed by this section is enforceable as if created by contract between the transferor and the transferee.
That is a sweeping provision indeed. Similarly, subsection (7)(b) says that
obligations imposed by direction are enforceable as if created by contract between the transferor and the Bank of England.
It is important that we keep a sense of proportion in having these sweeping provisions. If one goes too far with them it may well be resented by foreign legal bodies and diminish foreign law recognition. I would be reassured if the Minister could tell me that this point has been considered, that we have gone as far as we need to go and no further, that careful consideration has been given to foreign law recognition and that he is confident that, insofar as it is possible to ensure the certainty that he desires, this will indeed be the result.

Ian Pearson: Let me try to answer some of the direct questions that have been asked. The hon. Member for Gosport asked about the definition of foreign. I refer him to subsection (8), which makes it clear that this is a jurisdiction other than the UK. I am happy to confirm that property has a wider definition and is not confined to real estate.
This is an important clause. Subsection (3) states that
the transferor and the transferee must take any necessary steps to ensure that the transfer is effective as a matter of foreign law.
It is not the case, as the hon. Member for Wellingborough suggests, that we have to have extensive dialogue with other jurisdictions. We are trying to ensure that the transferor and the transferee fulfil obligations that we are imposing to take the necessary steps to help bring about a successful resolution.
Subsection (4) makes provision for the period before a transfer may be fully effective as a matter of foreign law. For this period the transferor must act on behalf of the transferee by holding any property or right for its benefit and discharging any liability on its behalf. Subsection (5) makes it clear that expenses incurred by the transferor in relation to these acts must be met by the transferee.
The hon. Member for Gosport raised some issues about what he regarded as the sweeping powers and obligations under subsections (6) and (7). As I sought to make clear in a previous debate on an amendment, we believe that it is important that there is enforceability as a contract in the unlikely instance where someone might be unwilling to comply. As I explained, in those circumstances there will be potential remedies that the authorities could bring, such as a claim for substantial damages. Other contractual remedies could potentially be available to encourage compliance with the obligation, and I mentioned an interim injunction or an order for specific performance. We think that it is right that those enforcement powers are contained in those subsections. As a general matter of course, however, we would expect to reach agreement with both the transferor and the transferee about the circumstances that will pertain with regard to foreign property. As is always the case when framing legislation, it is of course appropriate to consider every eventuality, and that is what we are seeking to do with some of the wording in the clauses subsections.

Question put and agreed to.

Clause 36 ordered to stand part of the Bill.

Clause 37 ordered to stand part of the Bill.

Clause 38

Procedure

Question proposed, That the clause stand part of the Bill.

David Gauke: I will raise two brief points on clause 38, which relates to the procedure followed after a property transfer is made. The Bank of England is required to send a copy to the relevant bank, the Treasury, the Financial Services Authority and any other person specified in the code of practice. I want to raise the issue of the role of Parliament. I am not suggesting that Parliament can or should be included within that list, but I assume that the Treasury would make available a property transfer instrument to Parliament, or would that not be possible because it contained information of a sensitive commercial nature?
My second point confirms that that would not be confidential because a copy of the instrument will be placed on the Banks website and in two newspapers. I would be grateful if the Minister could provide some guidance on that. Clearly, putting something on the website is cheap, but placing a copy of it in two newspapers might be expensive. Is that what the Government normally do, and what newspapers do they have in mind? From my memory of legal practice I know that notices used to be published in the London Gazzette, but I do not know whether that is what the Government have in mind. Perhaps the Minister could elaborate on which newspapers the Government intend to publish a copy of the instrument in.

Ian Pearson: The clause sets out various procedural provisions in relation to property transfer instruments and is analogous to clause 23, which makes similar provisions for share transfer instruments. Naturally, the making of a property transfer instrument will follow a period of intensive consultation between the authorities, and that is required by the provisions of clauses 7, 8 and 9, which we have already considered. The Clause adds to that process by providing for a formal requirement for the Bank of England to send a copy of the instrument to the FSA and the Treasury.
As the hon. Member for South-West Hertfordshire suggests, the clause also provides that the Bank of England should publish a copy of the instrument on its website and in two newspapers. We think that that is a reasonable requirement, designed to ensure that an instrument producing legal effects is adequately publicised and that all appropriate parties are fully aware of the transfer. In practice, given the ubiquitous nature of modern media, it is difficult to imagine a transfer being carried out under the radar, but I confirm that it is not our intention to do so. That is why we make it explicitly clear in clause 38(2), which overall is a relatively uncontentious clause.

Peter Bone: Other than not knowing which two newspapers, the contents of the clause are not contentious. That sort of detail has not been published on the current nationalisation of the three banks, although some draft memorandums of share transfers have been placed in the Library. Will the Government publish in that way the details of the current situation, even before the Bill goes through the House?

Ian Pearson: I shall confine my comments to the Bill. I stress again that we believe that it is right that the instrument is adequately publicised, because it alters legal rights. Publication in newspapers, in addition to on the Banks website, seems the most appropriate option. How much detail will be in the instrument will depend on the individual case. We have an appropriate procedure in the clause for the making of the property transfer instrument, and I urge that the clause stand part of the Bill.

Question put and agreed to.

Clause 38 ordered to stand part of the Bill.

Clause 39

Supplemental instruments

Ian Pearson: I beg to move amendment No. 96, in clause 39, page 17, line 39, leave out subsection (5).

Roger Gale: With this it will be convenient to discuss the following: Government amendment No. 97.
Government new clause 12Reverse property transfer
Government new clause 13Temporary public ownership: reverse property transfer.

Ian Pearson: The measures in this group are analogous to those that we debated under clause 25 on the share transfer powers.
I have already referred to the general context in which transfers may take place. The general principle is that due to the swiftness with which the authorities may have to act, and the complex nature of the businesses that they are acting on, it is sensible to provide for considerable flexibility. These measures provide further flexibility for supplemental and reverse property transfers.
Supplemental and reverse property transfers provide particularly valuable flexibility for property transfers. Not only do the powers provide the Bank of England with the means to ensure that an initial property transfer is effective, but they may also produce a better outcome for the resolution. For example, a further transfer of property to a bridge bank may increase the value of the bridge bank, in turn increasing the amount that a private sector purchaser is prepared to pay for the business. That will be treated as proceeds of resolution under a bank resolution fund, the net proceeds being available for the failing bank.
The Bill already provides flexibility to the Bank of England to make supplemental transfers in relation to the bridge bank stabilisation option. The Government consider it desirable to extend that power. Amendment No. 96 provides the Bank of England with the flexibility to effect a supplemental property transfer to a private sector purchaser. As I made clear in the debate last week on the analogous Government amendment for supplemental share transfers, the measure would be used where a transfer to a private sector purchaser had occurred at speed and before all due diligence could be completed. In that situation, a supplemental transfer of property could be made to ensure that the purchaser had all the relevant things for carrying on the banking business effectively.
The existence of the power should increase the likelihood of an immediate private sector solution being successful, as commercial purchasers are assured that the authorities have the means to ensure that the transfer is fully effective. However, I should emphasise that a supplemental transfer would never be made simply because a private sector purchaser had requested it. The action would have to meet the resolution objectives, and the authorities would have to consider it necessary and proportionate.
New clauses 12 and 13 introduce powers to make reverse property transfers. Those powers are available in three situations. The first is when the Bank of England has made an initial transfer to a bridge bank and wishes to transfer some of the property back to the failing bank. The second is when the Treasury has taken a bank into temporary public ownership, transfers property to a publicly owned onward transferee and subsequently wishes to transfer some property back to the bank in temporary public ownership. The third is when the Bank of England has a bridge bank, transfers some of its property to a publicly owned onward transferee and subsequently wishes to transfer some property back to the bridge bank.
In summary, the Government amendments provide the flexibility to make reverse property transfers subject to one constraintthat property may not be transferred back from the private sector purchaser.
It may help the Committee if I provide some examples of how the power may be used. If the Bank of England had transferred the majority of a failing banks business to a bridge bank but it became clear in due course that some small aspect of its balance sheet was not attractive to a private sector purchaser, that item could be transferred back to the failing bank, allowing the bridge bank to be sold. Another example would be using the power to transfer back if a particular class of asset suddenly deteriorated in quality. In summary, the powers may be used to optimise the balance sheet of the bridge bank.
The partial transfer safeguards apply to supplemental and reverse property transfers. They offer three protections. First, the authorities will need to provide the same degree of protection to set-off and netting arrangements when effecting supplemental and reverse property transfers. Secondly, security interests will need to be protected. Thirdly, supplemental and reverse property transfers will need to be taken into account when determining the compensation amount for creditors left in the residual bank. I look forward to debating those safeguards in detail when we come to clauses 42, 43 and 55.
In addition, the Government consider it appropriate to introduce another safeguard to run alongside the flexibility provided by the amendments. It is proposed that secondary legislation should set out a list of property rights and liabilities that may not be transferred back. For example, if a creditor in a bridge bank thought that the bridge bank would be transferred back to the failing bank, the creditor may not have sufficient confidence to continue doing business with the bridge bank. In broad terms, the Government therefore propose to protect liability holders from being transferred back. That, of course, includes depositors. I emphasise that in no circumstances would protected depositors be transferred back. The consultation document on safeguards, published last Thursday, provides further detail on this point; the document also consults on what types of asset and liability should be protected.
To conclude, the Government consider this group of amendments and new clause to be a worthwhile addition to the Bill. I remind the Committee that when using the powers provided by the amendments, the authorities must have regard to the special resolution objectives. They will guide any decision to make a supplemental or reverse property transfer. I hope that the Committee will accept the amendments and new clauses.

David Gauke: The Minister was right to mention safeguards in this context. I hope that we will turn to them shortly, although I note that according to the discussion paper that the Government produced last week, they are at an earlier stage of development than others, and draft secondary legislation has not yet been prepared. We are therefore unable to debate the detail of reverse and supplemental transfers today. We will return to that subject later.
The Minister gave hypothetical examples of how the provisions in the Government amendments and new clauses would be of assistance. That was a great help. However, as the Treasurys consultation paper makes clear, the amendments are driven by
the light of recent experience.
We may talk about hypothetical examples, but partial property transfers have already happened. We have seen it with Bradford & Bingley and with Kaupthing and Heritable. The Government are therefore able to benefit from the experience of those processes to find weaknesses within the system and seek to improve it.
It seems that the amendments, which have come relatively late in the process, derive from the experience of Bradford & Bingley and the Icelandic banks. The Minister will correct me if I am wrong, but that is the impression given by the Treasury document, which on two occasions says that in the light of recent experience, the Government consider it appropriate to increase flexibility.
We are not against flexibility in these circumstances. We have some sympathy with what the Government are seeking to do and the Minister made a reasonable case for the provisions. However, they seem to be a consequence of something happening in the Bradford & Bingley and Icelandic bank cases, so it might help the Committee if the Minister could explain the particular problems that arose in those cases and why the clauses would be helpful. He gave examples which sounded hypothetical, but are they in fact rooted in the experience of the past few weeks?

Ian Pearson: I fear that I shall have to disappoint the hon. Gentleman. I do not want to get drawn into a detailed discussion of Bradford & Bingley or Kaupthing Singer & Friedlander and Edge as these are obviously very recent events. In response to those circumstances and to the thinking that that has engendered within the authorities, we believe that the flexibilities in the amendments and new clauses could be beneficial in situations that might occur. We believe that the additional flexibility could enable successful resolutions and, as I indicated in my initial remarks, potentially optimise the balance sheet of a bridge bank and make the transfer to a private sector purchaser more likely.

David Gauke: I am not sure that it is entirely appropriate to decline to discuss a matter because it arises from recent events. The Committee is capable of discussing recent events. I stress that twice in three paragraphs the Treasury document makes it clear that amendments were introduced in the light of recent experience. It would be helpful to the Committee to know what that recent experience is.

Ian Pearson: As I explained, recent experience is obviously framed by specific situations in which the Government and the authorities have taken action, but it has also produced a great deal of thinking within the authorities about what powers are needed. It has given us the opportunity to look at hypothetical circumstances as well as real situations when framing the legislation. As a result of those broad deliberations, we believed that it was appropriate to provide additional flexibilities for the future. I do not want to be drawn on the detail, not because I am not happy to defend the actions that we have takenfar from itbut there is still the possibility of future litigation, so it is probably best that the detail of these matters is not directly discussed.

David Gauke: I am grateful to the Minister. May I put it another way? I take the point that events may inspire deeper thinking, new circumstances may emerge and hypothetical circumstances may be considered, but would he say that the inability to carry out supplemental and reverse transfers in the Bradford & Bingley and Icelandic cases has proven to be disadvantageous to the Government in trying to address those matters?

Ian Pearson: I do not want to get drawn on to that ground. We should bear in mind that we often deal with situations in which action needs to be taken very swiftly indeed, with only limited time for detailed analysis. As I explained earlier, in some cases due diligence will not have been possible. In those circumstances, having the flexibility needed to take rapid action can help to maintain the value of a failing bank. I think the hon. Gentleman broadly accepts what we are trying to do with the powers and he is trying to press us on the detail. I have explained to him why some of that is difficult, but the powers are, in our view, worth while and needed.

Peter Bone: I quite understand the Minister not wanting to be drawn on the specifics of the Bradford & Bingley situation but, in general terms and without being specific, would the Bradford & Bingley transfers have been easier if these tools had been in place?

Ian Pearson: The actions that the Government have taken with regard to Bradford & Bingley are entirely right, and those who look at these matters from outside welcomed them. It is not helpful to try to retrofit the experience of Bradford & Bingley into the Bills deliberations, although I am being invited to do so. The key learning points have been that the speed of events and the uncertainty that often arises require the flexibility to take action and the ability to transfer back, with safeguards in place, so that if a deal is done with a private sector purchaser, we will not go back on it. Being absolutely decisive and certain in that is helpful. The measure is designed to allow successful resolutions in the future, and I hope the amendment is agreed to.

Amendment agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

David Gauke: I have a brief question about drafting, which applies elsewhere. Subsection (6) states that:
Before making a supplemental property transfer instrument the Bank of England must consult...the FSA, and...the Treasury.
As far as I can see, there is no real guidance about what is supposed to flow from that. I query whether the wording should be notify rather than consult, because it is not clear what the FSA and the Treasury are being asked, and how the Bank of England should react to any responses received from them. Can the Minister outline how he sees that aspect working and why consult rather than notify is used?

Ian Pearson: We have discussed similar subsections in other parts of the Bill and at all stages I have been at pains to point out that the authorities work extremely closely together in these situations and on the exercise of the special resolution regime. When we are talking about supplemental property transfer instruments, it is important that we continue the dialogue among the Bank of England, the FSA and the Treasury. The word consult is right rather than notify when we expect discussions to take place. In the normal way in which these events are handled, we would expect a close consultation not just on transfer instruments, but far more broadly.

Question put and agreed to.

Clause 39, as amended, ordered to stand part of the Bill.

Clause 40 ordered to stand part of the Bill.

Clause 41

Temporary Public Ownership: Property Transfer

Amendment made: No. 97, in clause 41, page 19, line 4, leave out subsection (4).[Ian Pearson.]

Clause 41, as amended, ordered to stand part of the Bill.

Clause 42

Restriction of Partial Transfers

David Gauke: I beg to move amendment No. 144, in clause 42, page 19, line 26, after include, insert any.
This is a minor drafting amendment seeking greater clarity. I do not want to stray into the wider issues on clause 42, which are substantial. The amendment speaks for itself but I do not consider it vital. If the Minister has anything exciting to say about it, I am sure the Committee will be pleased to hear it, but I am happy to proceed to the stand part debate.

Roger Gale: Do I take it that the amendment is not moved?

David Gauke: Yes.

Question proposed, That the clause stand part of the Bill.

David Gauke: We finally reach clause 42, which is at the heart of many concerns about the Bill. To some extent the clause needs to be looked at together with clause 43. For these purposes, I shall make one or two introductory remarks. We recognise the advantages

Roger Gale: Order. Given that the amendment has been withdrawn and there is no amendment tabled for clause 43, I am content to take stand part debates for both clauses together, if that helps.

David Gauke: I am happy with that.

Roger Gale: Minister?

Ian Pearson: So am I.

Roger Gale: Fine. Let us do that.

David Gauke: I am grateful. My introductory remarks consequently apply to both clauses. Partial transfers are important to the manner in which the Bill is designed to work. They enable a bank to be split, with some assets and liabilities in one entity and the remainder in another. Essentially, we are left with what could be described as a good bank and a bad bank.
My hon. Friend the Member for Wellingborough eloquently set out his objections to the term toxic assets and the Minister tended to agree. None the less, there is one bank that is much more commercially attractive and therefore more likely to be acquired by a private sector purchaser, leaving another entity that will contain assets which, to put it kindly, will carry a degree of uncertainty. At a practical level, we have already seen the use of partial transfers in the case of Bradford & Bingley, Heritable and Kaupthing. We will return to those cases, although I know the Minister is keen not to be drawn too much on the subject.
Although the provisions relating to partial transfers are helpful in trying to address some of the difficulties with a failing bank, they are also the area that has caused most concern. Those of us in the Committee who heard evidence from the British Bankers Association and the London Investment Banking Association at the beginning of the process will be well aware of concerns that without sufficient safeguards, partial transfer provisions may have serious implications for the competitiveness of London banks.
I know that the Government recognise some of those concerns. Indeed, the consultation paper published last week highlighted a number of matters raised by stakeholders, including increased cost of capital for UK banks, higher regulatory capital requirements, potential evasion by counterparties, the likelihood that UK banks will seek to restructure their arrangements to ensure that partial transfers cannot easily be applied to business, and the ultimate possibility that all those factors might have adverse effects on UK financial effectiveness.

Peter Viggers: In supporting the thrust of my hon. Friends arguments, I remind him that the BBA said in a statement that its strong preference was for the special resolution regime element of the legislation, or at least the part dealing with partial transfers, to be deferred pending a much more detailed analysis of the cost and risk factors arising. In evidence before the Treasury Committee in July this year, the Governor of the Bank of England emphasised that it was far more important to get the SRR legislation right than to rush it according to a fixed timetable. I support the points that my hon. Friend is making.

David Gauke: I am grateful to my hon. Friend, who anticipates my comments and raises an important point. If there is one part of the Bill and the surrounding legislative framework that we need to get right, it is the safeguards provided here. My argument today will stress that, highlight the concerns and examine how the Government seek to reassure. I do not deny that the Government are aware of the issue and are seeking to address it. The Committee needs to examine in some detail whether they have succeeded.
The question is whether the Committee is in a position to make that assessment, because work is still very much in progress. The various methods by which the Government seek to address the issuethe safeguards in secondary legislation, and the code of practiceare at various stages of development and are not necessarily complete.

Peter Bone: My hon. Friend is introducing the amendment with his usual clarity, but one thing troubling me about the debate is the fact that in many cases, we are dealing with matters of which we have no knowledge. The situation is uncertain. We are in uncharted waters. However, in respect of partial transfers, we are not, because we have seen the examples of Bradford & Bingley and the Icelandic banks. Does my hon. Friend think that the Government are being fair in not being prepared to discuss those partial transfers in detail so that we have practical evidence of what happened?

David Gauke: My hon. Friend makes a valuable point. We have such experience. The Government have experience of how partial transfer works, and that is clearly guiding them, whether with concrete examples of problems that have arisen in the course of those transactions or through something less direct that has none the less been provoked and inspired by them. It is probably helpful to the Government, in assessing whether they are getting legislation right, to have gone through the experience of Bradford & Bingley, Kaupthing and Heritable, but it would be useful if the Committee could benefit from that experience as well. I encourage the Minister to be as open as possible with the Committee about the issues that have arisen from those cases.
I return to the concerns raised by outside bodies, particularly the BBA and LIBA. Essentially the concern relates to the cherry-picking of assets and liabilities so that the good bank gets what is commercially the best for it, leaving the bad bank with the more difficult assets and liabilities. The creditor is therefore left with a divide between the various assets and liabilities, which makes netting and set-off very difficult. It cannot be sure whether it can net or set off its assets, liabilities and contractual positions, which creates a great deal of uncertainty and increases its credit risk and its insolvency risk for counterparties dealing with British banks.
That will ultimately increase the cost of capital for British banks and reduce liquidity. That could have a long-term impact on the UK banking sector. The Treasury consultation document refers to the fact that the UK has a competitive advantage in this area. English law is attractive to creditors in such circumstances and that competitive advantage could be lost. That is perhaps a relatively cheery way of putting it. The fact is that we could be left with a competitive disadvantage if we get this wrong. The safeguards that we are debating in the context of clauses 42 and 43 are, therefore, very important.
I should like to raise one point about the architecture of these clauses. Clause 43 appears to a large extent to be a subset of clause 42. Both clauses refer to the fact that the Treasury may, by order, restrict the making of partial property transfers. It is clear what the different areas covered are. Clause 43 relates specifically to issues of netting and set-off, security interests, structured finance and so on. This is not a major point, but would it be possible to deal with all this under one clause? What is served by the separation of the clauses?
Clause 42 gives the Government power to make regulations limiting the scope of a partial transfer. Last week when I intervened on the Minister to ask whether the safeguards relating to partial transfer would be retained in the code of practice or the secondary legislation, he said:
The stakeholders we consulted this year have been very much of the view that they want the safeguards in secondary legislation, rather than in the code. We have taken that to heart, which is why we have produced the consultation document. It is right that those safeguards are enshrined in secondary legislation.[Official Report, Banking Public Bill Committee, 6 November 2008; c. 366.]
We will come on to the safeguards relating to netting and set-off, which the Government propose to address in secondary legislation. With regard to partial transfers however, they say in the consultation paper that although they have the power to make regulations limiting their scope, they do not intend to so in secondary legislation. They intend to do so within the code of practice. I should be grateful if the Minister could confirm that that is the case and explain why the Government do not intend to make regulations limiting the scope of partial transfers.
Within the consultation process three scenarios were set out as the possible scope of a partial transfer. The first was a transfer of the deposit book only, to ensure protection and continuity of service for depositors. The second was a transfer to facilitate a pre-agreed private sector purchaser resolution, and the third was a transfer to sanitise the balance sheet of a failing bank by separating good and bad assets. The Government have said that in the light of recent transferswe come back to the point about Bradford & Bingley, Heritable and Kaupthingthere needs to be flexibility. They argue that the three scenarios set out a while ago do not provide sufficient flexibility, and highlight how Bradford & Bingley required the transfer of related assets such as branches and systems. I understand that, but it seems that it would be perfectly possible, in the light of the recent experiences, to look again at the issue of scope and to amend definitions, so that when we refer to the deposit book we also include related branches and systems. We can return to the scenarios with a view to redrafting them to incorporate those things, and also perhaps to making them more flexible. Nevertheless, that could be done in secondary legislation. I do not see why the recent cases suggest that that cannot be done, and I would be grateful if the Minister would discuss that.
It would also help if the Minister could give us his assessment of how the Banking (Special Provisions) Act 2008 applies. I know that he will write to the Committee comparing the provisions in the 2008 Act with those in the Bill, and that will help. Will he outline how, with the benefit of hindsight, he sees that the 2008 Act provisions are flawed or inadequate, or fail to address the circumstances that may arise? We have some experience of thatas my hon. Friend the Member for Wellingborough made clearand it would help the Committee to know what the role of the existing provisions is, and why the provisions in the Bill will be of benefit.
I now turn to Bradford & Bingley. I know that the Minister is not particularly keen to address this matter, but, having experienced the splitting-up of that bank, what is his assessment of the cost of transferring the deposit book to Abbey Santander? What is his assessment of the value of the residual bank, which is essentially the mortgage book still held by Bradford & Bingley? I and my right hon. Friend the Leader of the Opposition visited the offices of Bradford & Bingley last month, and discussed the events involving the bank with staff and management. I would be grateful if the Minister could say where we are with Bradford & Bingley, and whether the Government have made any assessmentthis comes back to a point made by my hon. Friend the Member for Wellingborough a week or so agoof the value of the residual bank. Although we talk about a good bank and a bad bank, the bad bank tends to have assets that are uncertain. Where does the Minister see the taxpayer with regard to the part of Bradford & Bingley that has been taken into public ownership? It still has a substantial mortgage book; as mortgage holders come off their deals, they may be unable to find an alternative deal in the current circumstances and so go on to a standard variable rate. In those circumstances, Bradford & Bingley may prove profitable. I raise the question because it will give us a better understanding of how splitting good and bad banks may work, as a bad bank can do rather wella point made by the hon. Member for South Derbyshire.
May I raise a question about subsection (3), which seems strange? I do not know what it is meant to do, and it would help if the Minister were able to provide some guidance. It states:
Provision under subsection (2)
orders that the Treasury may make
may, in particular, refer to particular classes of deposit.
One senses that the draftsman has something in mind, but it is not clear to the Committee what it is. It would be helpful to know.
I have already mentioned netting and set-off. Again, I refer the Committee to the evidence received from BBA and LIBA. In essence, they were concerned about the possibility of partial transferthat a bank or a counterparty would be unable to get a clean, unqualified legal opinion that it could net-off for proper risk purposes. It would therefore have to account on a gross basis for the capital against credit risk. As I said, the Government recognise that concern, and I have cited paragraph 2.4 of the consultation paper.
Clause 43 provides for orders to be created to provide protection. I understand that the secondary legislation structure has evolved in recent months and days. Originally, there would have been a safeguard to ensure that netting assessments could occur for qualifying financial contracts. That proposal was contained in the special resolution regime consultation, but it did not get a particularly favourable response from the industry.
The next proposal was put to the expert liaison group, which met on 31 October. It was that the safeguards would be based on industry master netting agreements. The difficulty with that, identified by the expert liaison group, was distinguishing between an amended industry standard and a bespoke agreement, as a result of which there would be a degree of uncertainty and a potential for evasion.
As the Government propose again to use secondary legislation, all contracts that contain any kind of netting provision will benefit from protection, subject to specific carve-outs. The carve-outs are crucial. The level of protection will depend upon them. Broadly, they will consist of the following. First, it deals with contracts governed by foreign law. I can tell the Minister that paragraph 2.11 of the consultation paper contains an erroneous not in the first lineeither that or I misunderstand it. It covers contracts governed by foreign laws, which is why clause 36 is significant. We request clarification on contracts governed by foreign law, and what foreign property means.
The second carve-out is debt securities issued by the failed bank. The third is claims that are crucial to the preservation of banking security. It is clear from the draft order that it would include retail deposits, mortgages and other loans, and liabilities other than financial securities in the ordinary course of business.
The final carve-out deals with liabilities that constitute some or all of the counterpartys claims against the bank, which seems reasonably uncontentious, given that it would favour the counterparty. However, paragraph 2.15 states:
The Government will also consider adding other carve-outs that may be necessary to ensure sufficient flexibility, while still delivering sufficient certainty to the market. Consultation responses on this point are being sought.
Hon. Members have noted that great uncertainty remains about how that will work. The structure for providing protection depends on what the carve-outs are, and if they are too broad, or if we do not know what they will be, it will be very difficult for us to assess whether the level of protection provided is sufficient. That remains a concern.
In paragraph 2.16, the Government state that their
clear intention is to protect contracts relevant for regulatory capital purposes from the threat of disruption under a partial transfer. Therefore this consideration will outweigh any of the carve-outs listed above.
Clearly, that is designed to provide some comfort and help to the banking industry, which is to be welcomed, but we have two concerns. First, that wording is not contained in the secondary legislation, as far as I can see. Although it is helpful to see it in the consultation paper, it is not replicated in the draft order. Will the Minister explain why?
Secondlythis point has been raised by the BBAthere is a risk of circularity. Under certain circumstances, it is a precondition for netting arrangements to be recognised in the regulatory capital calculations. That would be legally enforceable. If legal enforceability depends on whether an arrangement is recognised for capital purposes, we find ourselves in a circular position. That is not say that the thinking behind paragraph 2.16 is not welcome, but given the circumstances it might raise, we should not be too complacent in making arguments about the carve-outs and saying, It doesnt really matter, because as long as we have paragraph 2.16 it is fine. There might be an issue of circularity.
To be fair, this point is in the consultation paper, but I would be grateful if the Minister could clarify that it is not the Governments intention that only contracts for regulatory capital protection purposes will be protected. We should pursue providing protection to all contracts containing netting provisions without a carve-out. That might provide the greatest certainty. That is discussed in paragraph 2.25, which says:
the Government believes that such an approach...would be too restrictive,
and essentially would mean that a
partial transfer could only be executed solely on the basis of transferring property counterparty by counterparty.
It would help the Committee if the Minister could explain how the issue of netting and set-offs was addressed with regards to Bradford & Bingley, Kaupthing and Heritable. Was it done on a counterparty by counterparty basis? What does the Banking (Special Provisions) Act 2008 allow for?

Peter Bone: It would be most helpful if the Minister could talk simply about the issues that arose in relation to the Bradford & Bingley partial transfer, so that we have an idea of exactly what the problems and issues were. We have a practical example. We should know the details.

It being One oclock, The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four oclock.